Precipio(PRPO) - 2019 Q2 - Quarterly Report

PART I. Financial Information This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, highlighting a net loss and going concern doubt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $22,205 | $21,605 | | Cash | $1,169 | $381 | | Total Current Assets | $2,331 | $1,793 | | Total Liabilities | $7,978 | $15,482 | | Total Current Liabilities | $4,750 | $13,765 | | Total Stockholders' Equity | $14,227 | $6,123 | Condensed Consolidated Statement of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $942 | $817 | $1,655 | $1,529 | | Gross Profit | $172 | $175 | $210 | $199 | | Operating Loss | $(2,295) | $(2,183) | $(4,354) | $(4,631) | | Net Loss | $(5,913) | $(2,831) | $(7,565) | $(5,270) | | Net Loss per Share (Basic & Diluted) | $(1.05) | $(2.29) | $(1.66) | $(8.20) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,887) | $(3,611) | | Net cash used in investing activities | $(30) | $(44) | | Net cash provided by financing activities | $5,705 | $3,305 | | Net Change in Cash | $788 | $(350) | | Cash at End of Period | $1,169 | $71 | Business Description and Going Concern Precipio is a cancer diagnostics company that operates a laboratory in New Haven, CT, and a research facility in Omaha, NE, focusing on its licensed ICE-COLD-PCR (ICP) technology - The company is a cancer diagnostics firm leveraging academic partnerships and its proprietary ICP technology[22] - There is substantial doubt about the company's ability to continue as a going concern due to a net loss of $7.6 million, negative working capital of $2.4 million, and net cash used in operations of $4.9 million for the six months ended June 30, 2019[23][26] - The company is relying on a $10.0 million equity purchase agreement with Lincoln Park to fund operations, with $5.9 million remaining available for drawdown[24][25] - The company regained compliance with Nasdaq's minimum bid price requirement after a 1-for-15 reverse stock split effective April 26, 2019[27] Convertible Notes As of June 30, 2019, the company had a minimal balance of $39,000 in convertible notes, down from $4.4 million at year-end 2018 Convertible Notes Balance (in thousands) | Note Type | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Convertible bridge notes, net | $39 | $3,830 | | Convertible promissory notes - Exchange Notes, net | $0 | $547 | | Total convertible notes, net | $39 | $4,377 | - In April and May 2019, the company issued new Bridge Notes for gross proceeds totaling approximately $1.9 million. These issuances included significant debt discounts, warrant liabilities, and beneficial conversion features, leading to immediate recognized losses of $1.9 million[56][62][66] - During the six months ended June 30, 2019, a total of $7.3 million in convertible notes (including Bridge, Crede, and Leviston notes) plus interest were converted into 2,386,425 shares of common stock[67][78][84][112] - All outstanding Exchange Notes ($2.8 million), the Crede Note ($1.45 million), and the Leviston Note ($0.7 million) were fully converted or settled during the first half of 2019[74][78][84] Commitments and Contingencies The company is involved in several legal matters - Settled a lawsuit with XIFIN, Inc. for $40,000 in April 2019[90] - Reached a settlement in principle in the Jesse Campbell lawsuit for $1.95 million, which will be primarily funded by insurance. The company recorded a liability for its remaining deductible of approximately $0.3 million[92] - A claim from CPA Global for approximately $0.2 million for patent services remains, with a liability of less than $0.1 million recorded[91] - Settled an outstanding debt of approximately $1.5 million with a service provider for payments totaling $0.6 million, resulting in a gain on settlement of $0.9 million for the six months ended June 30, 2019[94][96] Stockholders' Equity Stockholders' equity increased significantly from $6.1 million at year-end 2018 to $14.2 million at June 30, 2019 - A 1-for-15 reverse stock split was effected on April 26, 2019[27] - The company utilized its equity purchase agreement with Lincoln Park, receiving $2.4 million from the sale of 998,076 shares during the six months ended June 30, 2019[126] - During the six months ended June 30, 2019, the company issued 310,200 shares from warrant exercises for $1.6 million in cash proceeds and 2,386,425 shares from the conversion of $7.3 million in convertible notes[111][112] - Financing agreements in 2018 and 2019 triggered down-round provisions in preferred stock and warrants, leading to conversion and exercise price adjustments and the recognition of significant deemed dividends of $3.8 million in 2018[129][131][142][172] Revenue and Accounts Receivable For the six months ended June 30, 2019, net service revenue was $2.1 million, up from $1.7 million year-over-year, primarily driven by diagnostic testing Disaggregation of Service Revenue, Net (in thousands) | Revenue Source | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Diagnostic Testing | $1,678 | $834 | | Biomarker Testing | $427 | $856 | | Total Service Revenue, Net | $2,105 | $1,690 | - Customer A accounted for 29% of net sales in Q2 2019 and 26% for the six months ended June 30, 2019[216] - Customer A represented 28% of total net accounts receivable as of June 30, 2019, up from 23% at December 31, 2018[217] Accounts Receivable, Net (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Gross Accounts Receivable | $3,054 | $2,398 | | Less: Allowance for doubtful accounts | $(2,171) | $(1,708) | | Accounts Receivable, Net | $883 | $690 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 15% increase in net sales for Q2 2019 compared to Q2 2018, driven by a 16% rise in diagnostic case volume - The company's ability to continue as a going concern is in substantial doubt, dependent on generating more revenue and raising additional financing. The Lincoln Park equity line is a key source of capital[226][227][229] - Net sales for Q2 2019 increased 15% YoY to $0.9 million, driven by a 16% increase in patient diagnostic cases processed (445 vs 383)[230] - For the six months ended June 30, 2019, cash increased by $0.8 million. This was due to $5.7 million raised from financing activities (stock issuance, warrant exercises, convertible notes) offsetting $4.9 million used in operating activities[243][244][246] Working Capital (in thousands) | | June 30, 2019 | December 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Current Assets | $2,331 | $1,793 | $538 | | Current Liabilities | $4,750 | $13,765 | $(9,015) | | Working Capital | $(2,419) | $(11,972) | $9,553 | Quantitative and Qualitative Disclosures About Market Risk The company is a smaller reporting company as defined by the Securities Exchange Act of 1934 and is therefore not required to provide the information requested under this item - As a smaller reporting company, Precipio is exempt from providing quantitative and qualitative disclosures about market risk[253] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of June 30, 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[255] - No material changes to the company's internal control over financial reporting occurred during the three months ended June 30, 2019[256] PART II. Other Information This section details legal proceedings, key risk factors, unregistered equity sales, and a list of exhibits filed with the report Legal Proceedings This section outlines the company's recent legal activities - The lawsuit with XIFIN, Inc. was settled and paid in full for $40,000 on April 19, 2019[258] - The Jesse Campbell lawsuit has a settlement in principle for $1.95 million. The company's insurance will cover most of the cost, leaving a recorded liability of approximately $0.3 million for the company to pay[260] - The obligation to Bio-Rad Laboratories for $39,000 was paid in full during the second quarter of 2019[261] Risk Factors This section updates key risk factors, emphasizing the company's history of losses and the expectation of future losses, which could prevent it from achieving profitability - The company has a history of significant losses ($7.6 million net loss as of June 30, 2019) and expects to incur future losses, with no certainty of achieving profitability[267] - A critical risk is the need to raise substantial additional capital. Failure to secure funding could force delays, reduction, or elimination of product development and operations[269] - The company is subject to significant customer concentration risk. For Q2 2019, two customers represented approximately 40% of total revenue. One customer accounted for 28% of total accounts receivable at June 30, 2019[273][274] - Although the company regained compliance with Nasdaq's minimum bid price rule via a reverse stock split, it may be unable to continue to satisfy listing requirements, which could lead to delisting[275][276] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period covered by this report - None Other Information There is no other information to report for the period - None Exhibits This section lists the exhibits filed with the quarterly report - Exhibits filed include Certifications of the Principal Executive Officer and Principal Financial Officer under Sarbanes-Oxley Sections 302 and 906[280][281] - XBRL Instance Document and related taxonomy files were also submitted as exhibits[281]